How do you feel when a company on your Watchlist reports a profit after tax of N1.4billion in the first half of the year, only for it to now report a profit after tax of N395million at the end of the financial year? That was what NEM did in 2013 after it took it over 6 months to release its audited accounts. This year, their results are up to date (even though it leaves out important notes) and reports a profit after tax of N1.59billion for the first 9 months of 2014 and earnings per share of 30kobo (2013 FY was 7kobo). NEM insurance currently trades at 59kobo which based on this earnings per share (30kobo) makes the stock look very cheap.
However, learnings from the experience of 2013 one had to be circumspect about our expectations for 2014 FY and ask the important question of what will EPS be in 2014? This question is crucial because, whatever NEM declares as EPS at the end of 2014 will have a major impact on its share price. What could affect NEMs EPS negatively?
As mentioned, NEMs EPS dropped astonishingly when it released its 2013 FY results. A look at the results suggest this was what happened.
- Net premium income dropped by 48% in the second half of 2013 from N4.8billion to N2.5billion. Net premium income ended up at N7.4billion
- Despite this huge drop claims rose by 89% to N2billion in the second half of the year (from N1billion in H1). Underwriting expenses also rose by 63% in the second half of the year
- The company post an underwriting loss in the second half of the year.
- Operating expenses also rose 60% in the second half of the year
- The company post a loss of N1billion in the second half of the year compared to the first half of 2013 when it post N1.4billion profits
- 2012 results had similar occurrence with a loss of N545million in the second half of the year as against N1billion in the first half of the year
Looking at 2013 and 2012 results one feels compelled to think a similar trend might take place where the company will post another loss in the second half of the year. Unlike in 2013, NEM has released its 2014 9 months results which should provide some good insights.
- Net premium income for the first half of 2014 was N3.8billion. The company added another N1.9billion in net premium income in Q3 to take the total so far to N5.8billion. Except something catastrophic occurs in the last quarter of 2014, I expect Net premium income to add another N1.5 billion at the least
- Claims and expenses as at September 2014 was N1.2billion. I believe another N1.3billion in claims will be incurred in the final quarter of the year taking the total to N2.5billion. This is in line with the average since 2011 and also in line with industry peers who post claims as a percentage of Net premium income of between 40% to 47%
- Underwriting expenses was N1.8billion as at September 2014. However, we expect this to rise again by another N1billion to N2.8billion. This as above is in line with its historical average.
- Underwriting profits at the end of the year should hit about N2billion for the full year 2014.
- Insurance companies make a lot of money when they invest the free float at their disposal in exchange for some income. A huge portion of those investments are in equities. In fact as at 2013 NEM had about N1billion of its N2.6billion in Financial Assets in stocks.
- Those investments are marked to market with gains and losses accrued accordingly. Considering the massive sell-offs that took place in the last 10 weeks of 2014, NEM could have taken a hit of about between N350m to N450m in the last quarter. We assume N350m at the least. Therefore losses for the year on investments could be about N477million
- For example, it had about 56.6 million units of UBA as at 2013 and valued it at about N503billion. UBA ended the year at about N4 suggesting a valuation of N226b. That alone is N227m loss assuming it still held the shares. NEM also has about 13million units of Zenith Bank shares.
- Operating expenses which the company had recorded as N1billionas at September 2014 is likely to add another N600m by year end.
- Based on the above assumptions, NEM Insurance may just be staring at a loss of N1.7billion for Q4 2014 and a loss after tax of N100million for the full year.
- This might sound bizarre considering that it currently sits on profit after tax of N1.59billion as at September 2014.
- More bizarre thought is its method of financial reporting over the years which pushed a huge chunk of its expenses towards to the end of the year.
NEM as an insurance company has one of the best balance sheet in amongst its peers. It’s problem however is its very poor return on equity and high operating expenses which ensures margin remain very thin. NEM is currently priced at 59kobo and paid a dividend of 6 kobo in 2013 and 2014 respectively. Another 6 kobo dividend will suggest a yield of about 10%. Though unlikely that it will pay dividends if it declares a loss, it could still pay dividends out of its retained earnings. Its share price is likely to be volatile in the next few months with the bears taking a fair chunk of that volatility. But you can’t rule anything out in this market, any major announcement of a deal will surely have the bulls take control. For now though, NEM in our opinion has a negative outlook.